Debt Deals Spares Credit Unions

A last-minute deal that avoided a federal default spared credit unions from having to re-evaluate U.S. Treasury bond values on their books, a calculation other financial institutions had begun to make.

According to NCUA spokesman John Fairbanks, federally insured credit unions had about $6 billion in Treasury securities on their balance sheets as of Sept. 30.

While this may sound like a significantly large number, Fairbanks pointed out it represented less than six tenths of one percent of the $1.1 trillion in credit union industry assets.

Had the federal government defaulted, credit unions may have seen a shift from a customarily strong foundation for a balance sheet to what could have become a drag on their bottom lines.

Fairbanks declined to say what NCUA might have done in that circumstance, saying he did not want to speculate, but suggested the agency would not have valued the securities any differently in calculating risk based capital. He also said the NCUA would have instruct examiners to work with credit unions to overcome any losses

The possibility of losses arose after the $4.2 trillion dollar Fidelity Investments confirmed a report from National Public Radio that it was no longer holding U.S. Treasury notes that mature in October.

A spokesman for the mutual fund and investment giant emphasized that the firm expected Congress would resolve the current legislative impasse in time to prevent any significant default, but added that it had made adjustments to its investment mix just in case.

“We’re actively monitoring the ongoing debt ceiling discussions, and expect that Congress will take the steps needed to increase the debt ceiling and avoid default,” wrote Fidelity spokesman Steve Austin in a response to an emailed question. “While we have confidence that the U.S. will make payments on all U.S. Treasuries, to avoid even the remote possibility of minor delays in payment, we have made small adjustments to our money market fund portfolios. Fidelity’s money market funds do not own any securities issued by the U.S Treasury that mature in late October and we have increased the amount of cash in our U.S. Treasury funds,” he wrote, adding: “These changes affect only a very brief period of time and a small percentage of our U.S. Treasury holdings.”

Austin reported that Fidelity executives had started discussing the sale of U.S. October maturing Treasury notes in early October, and said the firm shared trade details.

He also pointed out that the firm stress tested its money market mutual funds and found them sufficiently strong.

“Stress testing is an ongoing process, which we review and update as part of our portfolio management strategies. In those tests, we take into account a variety of potential market scenarios and outcomes,” he said. n